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What methods are commonly used for forecasting?

Dec 20

Inventories are forecasted using past data, trends, and upcoming events to predict future needs. By using accurate forecasting, businesses can ensure they have enough products to fulfill customer orders while keeping inventory at a reasonable level.

What Is Inventory Forecasting?

Forecasting inventory has also been called demand planning. An inventory forecast is a calculation done to estimate how much stock will be required in the future to meet each customer's needs.

The accuracy of inventory forecasts is yet another critical factor. If your calculations are not accurate, you will not project inventory accurately, which will ultimately result in business losses. Using inventory forecasting, it is possible to predict how much stock you will sell in a specific time frame. Data on inventory consumption, sales, and purchases are collected to achieve that goal. It can also be beneficial to forecast inventory requirements based on customer demand.

How Can Inventory Forecasting Techniques Benefit You?

Techniques for inventory forecasting have several advantages:

  • Prevent stock-outs

One of its main benefits is that you can easily avoid the stock-out issue with inventory forecasting. Using inventory forecasting increases your inventory management efficiency significantly; running out of inventory results in revenue loss. The inventory forecasting service helps you determine when your stock will run out and when you should reorder it.

  • The return on capital

Good demand prediction is essential for forecasting inventory and generating a return on capital; extensive stocks drain companies of money. This results in increased inventory holdings and low return on capital, particularly in Europe, due to regional preferences and language requirements.

  • Improved planning

Inventory forecasting can be used to plan for upcoming events, festivals, or seasons during which more sales may be made. Profits rise when sales increase because more revenue means more revenue. Tracking trends can also help you grow your business. Planning in detail gives you a better perspective on the business and more efficient supply chain management.

What methods are used for inventory forecasting 

There are four methods commonly used for inventory forecasting, namely: 

  • Qualitative forecasting
  • Quantitative forecasting
  • Trend forecasting
  • Graphical forecasting

What is Qualitative forecasting? 

The best judgment to forecast qualitatively is to rely on the opinions and reviews of industry observers. Quantitative forecasts may include some data, but they are generally based on expert opinion rather than extensive analyses. Qualitative forecasting is particularly valuable in industries where recent disruptions have occurred and made the future very different from the past (new laws, significant innovations). Furthermore, it is useful when there is insufficient historical data to make a meaningful prediction.

The two most common forms of qualitative forecasting are the Delphi Method and market research.

The Delphi Method

An economist panel is asked to comment on a particular economic situation, then asked for predictions and analyses independent of the other experts, using the Delphi Method. Increasing forecast accuracy can be achieved by taking advantage of the depth and breadth of your panel.

Market research

Since generations have passed, market research and market survey forecasts have been used to determine whether prospects are likely to purchase a product or participate in an economic target. Such as, people of driving age may be given a brief questionnaire to determine what probability they have of purchasing a vehicle in the next ten years. This forecasting technique can be executed by various methods, including email surveys, interviews, focus groups, etc.

What is quantitative forecasting? 

For sales forecasts that are based on observable data, quantitative forecasting is usually the best approach. Quantitative forecasting is the process of identifying patterns and relationships between data to make predictions about subsequent events.

Data for quantitative forecasting can come from either business growth or sales records, census or survey results, or any other data that is relevant to your business. By discovering (or assuming) cause-and-effect relationships, your business can maximize the benefit from the variables.

The two most common forms of quantitative forecasting are time series analysis and the causal method.

Time series analysis

Using averages, establishing patterns, and extrapolating data, the past predicts the future in this technique used in quantitative business forecasting. Several variables will change over time, so you can provide reasonable future estimates using them. 

Consider, for example, the price of a lawnmower during the holiday season. You could do a time series analysis by assembling the price of a lawnmower over a defined period, such as the last year. Plotting these prices chronologically can provide insight into how lawn mower prices may change in a similar year. 

Causal method

Economic climates require an understanding of causal relationships, so business owners can prepare by forecasting how factors interact. By determining how elements such as price, sales, availability, production costs, and locations may affect future sales, causal forecasting can help you predict future revenue. By leveraging causal relationships, you can make your environment or market work to your advantage. 

Simple methods are often used alongside time-series analyses or as a natural extension. If you analyze monthly sales by a price based on time-series analysis, you may be able to determine that raising prices leads to higher sales. Based on your future pricing model, you could estimate rising or falling sales based on this type of forecast.

What is Trend forecasting

An example of a trend forecasting method would be analyzing past sales or market growth to predict likely future sales trends. An upward or downward trend is determined to calculate demand for a particular product, and the movement is used to forecast the market. You can make informed decisions about future sales and manage your inventory accordingly with this information.

What is graphical forecasting

By converting the sales data into a graphic form, you can analyze trends in sales more effectively, visually, and for more extended periods. As a result, you can identify existing inventory exploration, trends, and patterns, enhancing your forecasting ability.

What method is best for inventory forecasting? 

There are pros and cons to every method. Quantitative forecasting uses historical sales and revenue data to predict future opportunities, whereas qualitative forecasting relies on expert opinions and judgments. In trend and graphical forecasting, we examine trends in industries and markets and forecast their future. Whichever methods you adopt depends on your data and requirements. The qualitative approach is best for new businesses, but the other three methods can be used if your business is older.

Suppose you want inventory forecasting management software for your business, requirements checkout Inventooly. It is inventory management software designed to predict future forecasts, giving you better insights and data of your inventory and assisting you in supply chain management.